Lloyds shares: Hargreaves Lansdown investors are buying. Here’s what I’d do

Lloyds shares have rallied since the beginning of the month. Nadia Yaqub investigates if they are worth buying for her own portfolio.

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It is not surprising to see why Lloyds (LSE: LLOY) shares fell to 24p in September. The bank is predominately UK-centric and most of its business is generated from its retail division, which includes mortgages and credit cards.

Uncertainties over Brexit, the impact of Coronavirus and low interest rates have hardly been the ideal conditions for Lloyds. In fact, Hargreaves Lansdown points out that it has “been close to a perfect storm” for the bank and I would agree. Yet last week, Lloyds was the fourth most bought stock on the platform.

So what now for Lloyds shares?

Return to profitability

Lloyds released its third-quarter results in October, which were encouraging. The bank delivered a pre-tax profit of £1bn for the quarter, a significant uplift from the consensus forecast of £588m.

Investors were happy to hear Lloyds had returned a profit after recovering from a loss during the first half of 2020. The bank suspended its dividend earlier this year to preserve cash during the pandemic.

Mortgage lender

The UK’s biggest lender saw its mortgage business increase by £3.5bn from June 2020. This has been boosted by the the stamp duty holiday, introduced in July 2020, on all properties worth less than £500k until the end of March 2021.

Since a home is the average person’s main asset, I would expect Lloyds’ mortgage business to grow until then. To stop the property market grinding to a halt next year, I believe the UK Chancellor may even extend the stamp duty holiday beyond March 2021 or implement other measures.

Low interest rates

UK interest rates are low and I expect such levels are here to stay. Lloyds’ business model is very simple. It takes deposits in and lends money out. In order for Lloyds to be profitable it will lend out money at a higher rate than it pays on deposits.

Interest rates on deposits are already at rock bottom levels, which means that Lloyds can’t push its cost of funding much lower. Loan rates are close to low levels and don’t have further to fall. During the third-quarter, Lloyds not only saw an increase in consumer spending but also in retail current account deposits. Its appears that despite low interest rates, people are putting money aside for a rainy day.

If Lloyds is managing to survive when there is not much wiggle room on deposit and loan rates, I would expect the bank to be able to stumble its way through the pandemic.

Financially strong

Since the 2008 financial crisis, banks are now assessed on their Tier 1 Capital (CET1). This ratio dictates the bank’s financial strength, and hence the higher the value the better position it is in to weather the storm.

Lloyds’ CET1 Ratio of 15.2% highlights its strength and gives the bank significant headroom above its ongoing target of 12.5% and the regulator’s requirement of 11%.

My view

As a long-term investor, I would add Lloyds shares to my portfolio. It is a long and bumpy road for Lloyds and I do not expect a dividend to be paid out any time soon. Despite this, I believe the bank can emerge from this crisis.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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